Sharing the pie: how much should counties get?

November 30, 2017

Imagine a hypothetical household in Kenya today. The eldest daughter has just turned 18 and has been assigned the responsibility or ‘function’ of ensuring there is electricity in the house. The first thing she needs is enough money to pay the bills. If her mother does not give her enough, she will be forced to dig into her meagre earnings from her job as a receptionist at a local firm –earnings that are not always sufficient to cover the full bill. But if her mother gives her more than enough, the daughter might use the extra money for nights on the town with her friends, and the household may be short of cash for other
basic needs such as food and clothing. In other words, service delivery for both mother and daughter will deteriorate if funds aren’t allocated closely according to need.

This simple example also applies to Kenya’s devolution. In fact, the “funding follows function” principle is a golden rule of decentralization. It is designed to ensure as close as possible a match between expenditure needs and resources. In the story above, we can think of the national government as the mother and the county governments as the daughter.

Counties should receive enough funds to run the functions given to them by the constitution. Yet counties should not receive much more than they need because, firstly, it could leave the national government unable to resource its functions, and secondly, it may encourage irresponsible spending at the county level, especially if controls are weak. By the same token, counties should not receive less than they need since this would mean lower levels of service or interrupted provision.

But working out how much funding counties need is tricky. It assumes that there is clarity over two things: specifically what services counties are expected to pay for, and how much they cost. The Fourth Schedule of the Constitution only defines the functions of counties broadly. These broad functions do not tell us clearly about who should pay for all the different detailed activities of government. To take an example from our hypothetical household, while the daughter is now responsible for ensuring there is electricity in
the house, the mother might still keep control over when electricity is used, setting a household policy that cooking be restricted to the gas cooker in order to cut the electricity bill. Getting the assignment of functions right will require a detailed and transparent framework and a process of consultation between line ministries, central government, and the Transition Authority created to manage the process.

Counties will not take on their newly assigned functions and funding overnight – there will instead be a managed transition process. The Transition to Devolved Government Act created the Transition Authority (TA), which is responsible for facilitating the phased transfer of functions to county governments. It will do this by determining readiness criteria counties must fulfil in order to take on functions, and assessing whether or not counties have reached a state of readiness. The transfer of functions will comprise two
phases: In Phase 1 (before counties are established), the TA decides which functions are transferred immediately after counties established, and in Phase 2 it decides criteria for transferring other functions.

However, in practice it will be chaotic if Phase 2 is done on a function-by-function and county-by-county basis. The Fourth Schedule of the constitution lists 14 county functions, so that there would potentially need to be 658 separate function transfer decisions (i.e. one for each of the 47 counties). This is totally unrealistic in practice and would create confusion and undermine the accountability of the county governments at a crucial early stage. Therefore there needs to be some ‘bundling’ of functions to simplify the process into manageable chunks, perhaps grouping them into 3 phases, where each phase would
include exactly the same functions for each county. The TA will last for a 3-year transition period, and parliament will have the option of extending this time horizon by an additional year if necessary.

Many counties may not be ready to take over some functions on day 1 after the elections. The Constitution specifies a three-year transition period during which functions should be transferred progressively. Each county will need to apply individually for functions, and the Transition Authority will decide if they are ready to take them over. A strategy or ‘roadmap’ will be required to guide this phased transfer will happen. If different counties have different combinations of functions, accountability is complicated. Citizens need to know which level of government they should look to for specific services, or they cannot hold them properly responsible.

What appears clear is that county expenditure needs will require significantly more than the constitutional bare minimum 15 per cent of national revenue. To estimate these needs, the best available starting point is to look at existing spending by the national government on future county functions. Not all funding needs to be paid through the equitable share and any needs on top of the 15% might be better transferred as earmarked grants, at least at the start. Earmarked funding can be shared more flexibly, to take account of the fact that some counties will need extra funding at the start, in order to catch up with other areas that have been better funded in the past.

It is a mistake to think that devolution means more money. The amount of government revenue is likely to remain the same, but it will be distributed differently. While some counties may be winners through redistribution, others will be losers. Hopefully politicians who are closer to citizens will make better decisions about spending on projects and services, but devolution will not bring a cash bonanza of new funds. This is especially true if economic growth fails to trend up significantly: there will only be very limited additional revenues for the first years of devolved government, and lots of new fixed costs associated with setting up county governments.

It is also important not to short-change the national government. It will retain responsibility for important and costly functions, like education, the justice system, police and social protection. In the current uncertain macroeconomic environment, national expenditures such as spending on paying the national debt, and on paying the salaries of teachers, soldiers and police, will continue to command the lion’s share of public spending.